For over a year now we have been warning that many large Euro banks are in serious financial trouble. This week, after burning €3.6 bln ($4 bln) of emergency central bank funding in the first two days of the week, Spain’s Banco Popular suffered the eurozone’s first large-scale bank run. A steady stream of deposit withdrawals turned into a full fledged flood as news that the bank was in trouble spread. Note that this was just days after their chairman told his employees “don’t panic”, as stock prices tumbled.

The Spanish bank, weighed down by €37 bln ($41.4 bln)) in mostly toxic property loans, was forced to tell authorities in Madrid on Tuesday that it would be unable to open the next day without a rescue deal to shore up its rapidly evaporating liquidity.

This is the first crisis under the EU’s new regulations related to failing banks, where the rescue of the bank does not impact depositors, burden taxpayers, or they hope, freak out the markets. The big losers are the shareholders.

Understand that Banco Popular is by no means the only bank in Europe at risk. The total value of non performing loans (NPL) in Europe is €1.06 trillion! That €1.06 trillion equates to 5.4% of the entire EU’s total loans, and it is more than triple that of other large banking sectors such as Japan and the US.

But while the whole EU has 5.4% of toxic loans, on a country by country basis, the picture is much scarier. A shocking 10 of the 28 EU countries have an NPL ratio greater than 10%.

Cyprus 49%

Greece 46.5%

Slovenia 19.8%

Portugal 19.2%

Italy 16.6%

Ireland 15.8%

In Cyprus and Greece almost 50% of all loans are non-performing. Italy, whose €350 billion of NPLs accounts for over 66% of Europe’s entire toxic debt stock.

This change of policy where taxpayers and bank clients are not the victims is a popular one. In the Banco Popular rescue the solution was that the European regulators took control of the struggling bank, wiping out its shareholders and junior bondholders, then selling the bank for a symbolic €1 to its bigger rival Banco Santander, which was the only bidder in the overnight sale process.

This brings a whole new risk to owning Euorpean banking stocks. If you owned Banco Popular stocks, you just lost 100% of your investment. There was no bankruptcy sale, no sale of assets such as property etc, to offset losses to shareholders.

The game has changed and there will be many more bank failures as the percentage of toxic loans in Europe is massive!

Q: I am a new subscriber and see that you have projected the S&P 500 to hit 3000 in 2018, how do you justify such a projection?

A. We are currently in the middle of one of the biggest bull markets in history. Historically, before the top blows off a bull market there is a final massive run up as the mass investors jump on board.

We see this phenomena in every sector: stocks, real estate, precious metals, you name it. Before the real estate crash in 2005, everyone, and we mean everyone, was talking about how much their home was worth and how there is only so much land, so prices could never go down.

It was the same for the Japanese market back in the 1980’s. As highlighted below, the Nikkei Index jumped over 100% in the last couple of years of that bull market as the masses piled in, wanting to get in on the big gains.

Back in the 1920’s, leading up to the Great Depression, the Dow Jones climbed almost 400% from 1922-1929, with a big portion of that move in the final year as investors believed that the stock market could only go up. The higher the market went, the more euphoric the investors became.

The key is that the final run up of a bull market can be massive. Today, there is no euphoria about the stock markets. Just recently we had investors pouring money into long-term bonds earning in some cases, negative returns.

According to Blackrock’s CEO Rob Kapito, investors have stockpiled some $70 trillion in cash, and now, due to low returns in the bond market, those investors are starting to move their capital into equities. That is a massive amount of cash that has been sitting on the sidelines as investors burned in the 2008 crash wanted nothing to do with equities.

Are we at the top here – we do not think so? In January our models called for the S&P 500 to reach 3,000+ by mid 2018, and that forecast has not changed. We are certainly due for a correction soon, and not the one-day correction that we saw last week. But we would see a correction as a great buying opportunity.

Bull markets end when everyone is in, and there are no more buyers. That is not the case today. There are still tens of trillions of investor’s dollars on the sidelines today. The end of this bull market will come when all bull markets end, and that is when the masses all start to pile in during the last couple of months of the bull market.

Right before the end, we will see headlines calling for massive gains, as euphoria will be rampant. Soon after that manic euphoria we will see this market crash. But that is not the case today, today we are looking for the S&P 500 to hit 3000+ in 2018.

With this being such a critical time for the US and global economies, the US voted in Donald Trump, a candidate who was a non-politician, who represented change. Trump was elected with a platform of tax and regulatory cuts, and infrastructure spending. He also promised to “drain the swamp” and remove the corruption and lobbying that is the norm in Washington.

So Trump’s challenge was enormous enough as it was, but the fact that Trump cannot stop being Trump is making it almost impossible for him to make good on his promises. The more he shoots off his mouth and Tweets, the more he alienates his political supporters. Trump cannot implement all his promises without the approval of the Congress.

His latest scandals relate to meeting with Russians and allegations he asked FBI director Comey (now fired) to shut down an investigation into former National Security Advisor, Gen. Michael Flynn. The latter of these issues has the mainstream press all giddy with talk of impeachment.

The stock markets have not taken kindly to Trump’s latest indiscretions. Lately, the NASDAQ and S&P 500 both hit new all-time highs, but the Dow Industrial Average did not confirm. We were watching to see if the S&P 500 could have a weekly close above 2400, which would be very bullish.

With the latest Trump news, we saw volatility spike over 42% today. With the stock markets we saw the NASDAQ drop 158.63 points or 2.57%, the S&P 500 down 43.64 points or 1.82%, and the Dow down 372.82 points or 1.78%.

The problem for the markets is that with all these distractions the odds of getting any tax reform before the summer break is in serious decline.

Keep an eye on the 2325 level (top dotted line) level for the S&P 500, as it represents the Near-term Support and a break below that level brings 2300 into sight. A break below 2300 would open the door for a significant correction. A 7% correction would take the S&P 500 to 2238 (lower horizontal line).

At this point the April monthly close could prove to be significant. While the Dow did not confirm with a new high, if we get all three indexes with a May monthly close below the April close, then we could see a prolonged correction here.

A prolonged correction here would set up for a very welcome buying opportunity. Our model’s projection for a global debt crisis remains on target, meaning that ultimately we will see massively indebted countries default on their debt, and the global flow of capital will seek out safer private investments such as North American equities.

As the masses realize that it is governments that are the problem, investors will dump government bonds and buy equities and gold. A serious stock market correction here would set up very well with our model’s projection of one final rush out of equities into bonds, and then we see Europe start to collapse, and the first of many Sovereign Debt Defaults.

Timing is the key. If you understand the global flow of capital, you will not only survive this coming global Sovereign Debt Crisis, you will be in position to prosper significantly. If you don’t, you won’t!

A glorious day in stocks resulted in the worst tumble in over 8 months. This was very long overdue and had nothing to do with U.S. politics. Hopefully it’s the start of a lasting trend, however for now we’ll call it a good start.

All our positions were up today with the exception of TBT. Most notably, VXX rose 18% today alone.

As good a start as that is, a bear market has not necessarily begun. Reasonable expectations remain that markets make a new all-time high, possibly with non-confirmations among major indexes, then a protracted market drop will finally commence. This may have already occurred with the NASDAQ and S&P500 again marking new all-time highs this week while the DJIA has not done so since early March.

In any case, an enduring and deep bear market looms and it’s safer to be short in the current technical and fundamental environment.

NIB (2nd position) – opened at $23.63 on May 08 No stop on this position as we intend to own it until cocoa is above $2500, however if you have both positions and wish to limit risk on at least one then we suggest a sell stop at $20.90

Indicators

Daily: bearish, 20890. Short-term highly aggressive traders and hedgers may wish to be net long when the DJIA is above this level, and net short below.

Weekly: bullish, 20845. Moderately aggressive investors, trading or hedging on an intermediate basis, who follow the Weekly Indicator may find it prudent to be hedged or net short if the DJIA is trading below this pivot level.Reminder – we do not have an official change to “bullish” or “bearish” unless the DJIA closes the calendar week above/below this pivot level as the case may be.

Monthly: bullish, 20400. Conservative investors, trading or hedging on a longer-term basis, who follow the Monthly Indicator may find it prudent to be hedged or net short when the DJIA is trading below this pivot level. Reminder – we do not have an official change to “bullish” or “bearish” unless the DJIA closes the calendar month above/below this pivot level as the case may be.

NOTE : Speculators and frequent traders will prefer to use the Daily or Weekly Indicator levels as trading or hedging pivot points, while longer-term investors may prefer to consider only the Monthly Indicator level.

General Recap

As of March measures, U.S. investors were holding 52% stocks relative to cash. In nearly 30 years, fewer than 10% of months have shown measures as high as 52% in the stocks-to-cash ratio. Most of those months were toward the end of the massive market top of the late 1990s.

U.S. Margin debt is 38% higher than at the market peak of July 2007 and 90% higher than the market top in March 2000.

As of early February 2017 the Investment Intelligence Advisors’ Survey has registered a bullish percentage that shows the highest level of optimism in 30 years. That’s extremely bearish, and the last time this reading was higher was in 1987 before the major market crash that year.

Here’s a look at the Shiller 10-year price/earnings ratio as of late January 2017. The implications are self-evident and ominous.

Complacency and imprudence is not rewarded in the long term. Whenever the top is hit the gains in 2017, at least, will be unwound in a matter of days or weeks.

Consider too that a lasting bear market hasn’t happened in decades. The crash of 2000-2003 was fully reversed by 2006 and the DJIA was at all-time highs by 2007. The crash of 2007-2009 was fully reversed by 2012 and by the end of 2016 the DJIA was at a far higher all-time high. We may well be approaching a lasting top in equities before a real, and long, bear market. Act accordingly with respect to risk, position sizing and stops. Anything you buy, be prepared to buy again (or sell) at half the price or less. Always.

Risk is very high. A material and lasting correction in equities is years overdue, while some bullish measures are at extremes not seen since the peak of the tech bubble in the late 1990’s.

In the “big picture” it’s not a safe time to enter long-term holdings which is why the only longs we’d considered keeping at least paid high dividends.

One well-timed entry can be far more profitable than rushing into a dozen positions simply to be doing something, so those with a long-term outlook are best advised to wait for a significant market low even if it takes months or years, or at least get paid dividends while waiting.

The old adage applies – “If in doubt stay out”, and wait for new opportunities as they come up.

Prudent position sizing and risk management are key. Without risk however there can be no reward, so over time we’ll seek to mitigate risk via true diversification and buying only when shares seem beaten down and oversold, as well as adopting general market short positions at prudent times in order to hedge.

In 2016 US auto makers sold more cars than ever before, with many of the mainstream media hailing this as clear evidence of rising consumer confidence. But it was not just auto sales that revved higher, so too did auto loans.

US auto buyers racked up $1.2 trillion in auto loans last year, an increase of 9% from the previous year. Meanwhile, the number of vehicles purchased increased by only 1.5%, highlighting that auto loans are now representing a higher percentage of household debt.

It is not just that auto loans are increasing that we find concerning, it’s the fact that auto loans made to consumers with subprime credit have accounted for a growing percentage of the market. These increased sales have been achieved by aggressively pushing people into auto loans that they cannot afford.

It’s not like we haven’t seen this movie before. In 2007/08 we entered the subprime mortgage crisis, all based on lending too much money to people who had poor credit ratings. When they defaulted on their mortgages, we saw the US real estate market implode.

So now in the auto loan sector, delinquencies have moved up as the credit quality of the loans has deteriorated and the length of the auto loans has increased, up to 84 months.

Auto loan delinquencies hit the highest level since the financial crisis as more than six million American consumers are at least 90 days late on their car loan payments, according to the Federal Reserve Bank of New York.

“The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years,” said the bank

About $23.27 billion in loans were 30 days or more late as of Dec. 31, a whopping 14% increase from the year earlier and the most since the $23.46 billion in the third quarter of 2008.

Moreover, of those subprime auto loans, the New York Fed said a full 75% originated with auto finance companies which have been loosening their credit standards since 2010.

As a result of these weak lending practices by the auto finance companies, almost 5% of their auto loans were running at least 90 days in arrears during the fourth quarter, compared with 1% for auto loans issued by banks and credit unions.

As we should have learned in the subprime mortgage crisis, when you make loans to people who cannot afford them, eventually many of those loans are going to go bad, which is what is happening now.

In addition, sales are declining and used car prices have dropped, none of which makes us want to own stock in the automakers today.

There are many factors that affect the precious metal prices. There are basic supply and demand factors, such as demand for jewelry, electronic, and medical devices. Precious metals are also investments, often acting as a hedge against geopolitical events and a loss of confidence in government.

Precious metal prices, like most commodities prices are also affected by the strength of the $US. Given that the $US is the world’s reserve currency, when the $US is strong, the price of precious metals typically declines, while a weaker $US generally sees the price of precious metals rise.

The mainstream media is full of daily stories as to why gold and silver will rise or fall, and investors make their decisions often based solely on those news reports. In the futures markets there are two main groups of investors: Large Speculators and Commercials. The Large Speculators are hedge funds who use the futures market to speculate on the price of gold and silver.

Commercial traders are producers and merchants, these are the “insiders”, the ones who are on the ground floor. While Large Speculators are trend followers, Commercial traders are counter-trend traders and are the most accurate at timing key market turns.

As we highlighted in last week’s issue of The Trend Letter, silver bulls have their rally hats on, with Large Speculators (green line in lower half of chart below) in an all-time record long position. At the same time, the Commercial traders (red line) are in an all-time record short position.

The chart shows that when we see the spread between Large Speculators’ long and Commercials’ short position widen, we typically see the sector turn down. The current spread for silver is at a record high, suggesting that silver prices are overbought.

When we get into a situation like this it implies that all the bulls are already in, there are no more buyers. With the speculative bulls all in, the only new source of potential buying of any size would be from Commercial traders looking to hedge. This would only occur if prices climbed high enough that the Commercials capitulate and buy back their short positions.

Commercial traders short silver in the futures market to lock in today’s price for future production. For these traders, their short positions are backed by actual silver bullion. If prices move higher, the Commercial traders will incur paper losses in the futures market, but they are off-set by gains on their silver bullion inventories which rise in value.

It is seldom a good idea to bet against the Commercial traders, so given the extreme spread between the Large Speculator long position and the Commercial short position, caution is advised here for anyone long silver.

France had the first round of its presidential election yesterday, and in order for a candidate to win, they would have had to receive over 50% of the votes. If no candidates gets more than 50% of the votes, then the top two candidates move on to a run-off election on May 7th.

No candidate received 50% of the votes, and the two top candidates were a centrist candidate, Emmanuel Macron, with 23.7% and right-wing candidate Marine Le Pen with 21.7% of the vote. It is noteworthy that this was the first time in modern history that no mainstream party made it to the second round run-off.

Prior to the election the markets were worried that France would end up having a run-off election between a far-right and far-left candidate, both anti-EU, which could have meant the effective end of the European Union as we know it.

But centrist candidate Emmanuel Macron made it to the run-off against the anti-EU Le Pen. Current polls project a Macron victory as he is running at 69% to 31% for Le Pen. The markets tend to like the status quo so a projection of a Macron victory has sent the Euro and global equity markets higher, while gold and other “safe- haven” bets moved lower.

While the markets are ‘relieved’ that Marcron is leading the polls, we must remember that he is very pro-EU which represents the status quo, meaning continuing down the same flawed path. Einstein defined insanity as “doing the same thing over and over again, expecting different results.”

The mainstream media is hailing Macron as a pro business candidate, but we must remember that not only is Macron pro the EU, he wants the EU to have even more power. Europe has spent the past four decades living in an ‘age of entitlement’, with governments offering handouts every election, treating its voters like heroin addicts, their motto being “just promise them more stuff, and they will be happy.” It didn’t matter which party, they all did the same thing. The problem was they didn’t have the money to pay for all these freebies, and now we are on the verge of a massive debt crisis.

We are not promoting Le Pen as a better choice, but we are saying that by electing a pro EU leader the French people will be sending a very dangerous message to the politicians and bureaucrats in the EU. A vote for the status quo will be seen as an endorsement by the political elite.

As investors it tells us that should Macron get elected the problems in the EU will continue because the pressure to reform will subside. Those in charge have run the European economy into the ground, initiating monetary policies that included forcing negative interest rates onto consumers. They have robbed the seniors of any return on their savings, and have now jeopardized pension funds, which have incurred massive funding gaps thanks to low rates.

And look what all their policies have done for the young people in Europe. These are the current unemployment rates for young people under 25 in each country. Seven countries have a youth unemployment rate of over 23%, including Spain, Italy, and Portugal.

While the mainstream media is applauding a pro- EU president for France, as investors we see it as a vote for the status quo which will delay the required reform to get Europe out of its financial mess.

European countries have deep, rich, and varying cultures, and the concept that 19 countries with vastly different cultures, could co-exist, sharing a single currency, but not a single debt, was doomed from the beginning. It puts countries with under-performing economies at the mercy of those with more robust economic performance.

A pro-EU president for France will simply delay the required positive reforms and prolong the “era of entitlement” driving the economy further into the ground until we hit the “age of consequences.”

The EU needs another smack in the face much like Brexit, forcing major reforms to how it manages its economy. A pro-EU vote will simply delay the much needed reforms in Europe.

According to Bloomberg the demise of so many retailers has left shopping malls with hundreds of slots to fill, and the pain could be just beginning. More than 10% of US retail space may “need to be closed, converted to other uses or renegotiated for lower rent in coming years”, according to data provided to Bloomberg by CoStar Group.

Urban Outfitters Chief Executive Officer Richard Hayne didn’t mince words when he sized up the situation last month. Malls added way too many stores in recent years — and way too many of them sell the same thing: apparel.

“This created a bubble, and like housing, that bubble has now burst,” he said. “We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”

Year-to-date store closings are already outpacing those of 2008, when the last U.S. recession was raging, according to Credit Suisse Group AG analyst Christian Buss. About 2,880 have been announced so far this year, compared with 1,153 for this period of 2016, he said in a report.

Extrapolating out to the full year, there could be 8,640 store closings in 2017, Buss said. That would be higher than the 2008 peak of about 6,200.

Many retailers are trying to re-emerge as e-commerce brands. Kenneth Cole Productions said in November that it would close almost all of its locations. Bebe Stores Inc., a women’s apparel chain, is planning to take a similar step. But these brands who are trying to move aggressively online are having trouble trying to keep up with the growth in market leader Amazon.

The Seattle-based company accounted for a massive 53% of all e-commerce sales growth last year, with the rest of the industry sharing the remaining 47% according to EMarketer Inc.

This glut of malls is predominately a US issue, as “Retail square feet per capita in the United States is more than six times that of Europe or Japan,” Urban Outfitters’ Hayne said last month. “And this doesn’t count digital commerce.”